12 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________to_________ Commission file number 0-11129 COMMUNITY TRUST BANCORP, INC. (Exact name of registrant as specified in its charter) Kentucky 61-0979818 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 208 North Mayo Trail Pikeville, Kentucky 41501 (address of principal executive offices) (Zip Code) Registrant's telephone number (606) 432-1414 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock - 10,062,597 shares outstanding at July 31, 1998
PART I - FINANCIAL INFORMATION Item 1. Financial Statements The accompanying information has not been audited by independent public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal and recurring nature. The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the registrant's annual report on Form 10-K. Accordingly, the reader of the Form 10-Q should refer to the registrant's Form 10-K for the year ended December 31, 1997 for further information in this regard. Index to consolidated financial statements: Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6
Consolidated Balance Sheets June 30 December 31 (In thousands except share data) 1998 1997 Assets: Cash and due from banks $74,435 $60,611 Interest bearing deposits in other financial institutions 101 793 Federal funds sold 210,171 0 Securities available-for-sale 146,897 165,611 Securities held-to-maturity (fair value of $96,558 and $115,150, respectively) 97,105 115,931 Loans 1,476,247 1,428,429 Allowance for loan losses (22,541) (20,465) Net loans 1,453,706 1,407,964 Premises and equipment, net 50,710 47,668 Excess of cost over net assets acquired (net of accumulated amortization of $8,226 and $7,720, respectively) 33,650 17,746 Other assets 39,631 36,343 Total Assets $2,106,406 $1,852,667 Liabilities and Shareholders' Equity: Deposits: Noninterest bearing $213,593 $193,353 Interest bearing 1,491,945 1,271,650 Total deposits 1,705,538 1,465,003 Federal funds purchased and other short-term borrowings 40,146 57,949 Other liabilities 18,808 16,406 Advances from Federal Home Loan Bank 126,065 101,827 Long-term debt 53,367 53,463 Total Liabilities 1,943,924 1,694,648 Shareholders' Equity: Preferred stock, 300,000 shares authorized and unissued Common stock, $5 par value, shares authorized 25,000,000; shares issued and outstanding, 1998 - 10,062,597; 1997 - 10,062,487 50,313 50,312 Capital surplus 28,037 28,067 Retained earnings 83,388 79,026 Accumulated other comprehensive income 744 614 Total Shareholders' Equity 162,482 158,019 Total Liabilities and Shareholders' Equity $2,106,406 $1,852,667 The accompanying notes are an integral part of these statements.
Consolidated Statements of Income Three months ended Six months ended June 30 June 30 (In thousands except per share data) 1998 1997 1998 1997 Interest Income: Interest and fees on loans $34,442 $32,656 $68,145 $64,374 Interest and dividends on securities Taxable 3,088 4,304 6,460 9,103 Tax exempt 512 684 1,150 1,357 Interest on federal funds sold 603 423 798 589 Interest on deposits in other financial institutions 0 6 5 18 Total Interest Income 38,645 38,073 76,558 75,441 Interest Expense: Interest on deposits 16,433 15,450 32,278 30,520 Interest on federal funds purchased and other short-term borrowings 402 387 925 814 Interest on advances from Federal Home Loan Bank 1,841 1,760 3,603 3,510 Interest on long-term debt 1,192 1,048 2,384 1,461 Total Interest Expense 19,868 18,645 39,190 36,305 Net interest income 18,777 19,428 37,368 39,136 Provision for loan losses 4,053 1,731 6,558 3,449 Net interest income after provision for loan losses 14,724 17,697 30,810 35,687 Noninterest Income: Service charges on deposit accounts 1,836 1,821 3,474 3,513 Gains on sale of loans, net 666 242 1,104 447 Trust income 479 474 911 871 Securities gains, net 12 (46) 12 46 Other 2,824 1,250 4,352 2,308 Total Noninterest Income 5,817 3,741 9,853 7,185 Noninterest Expense: Salaries and employee benefits 6,834 6,847 13,912 14,413 Occupancy, net 1,149 1,017 2,162 2,032 Equipment 939 939 1,895 1,920 Data processing 839 701 1,678 1,375 Stationery, printing and office supplies 458 455 839 896 Taxes other than payroll, property and income 544 546 1,065 1,071 FDIC insurance 71 79 133 114 Other 3,468 4,152 6,676 7,804 Total Noninterest Expense 14,302 14,736 28,360 29,625 Income before income taxes and extraordinary gain 6,239 6,702 12,303 13,247 Extraordinary gain (loss), net of tax 0 0 0 3,085 Income before income taxes 6,239 6,702 12,303 16,332 Income tax expense 1,999 2,146 3,899 4,230 Net Income 4,240 4,556 8,404 12,102 Other comprehensive income, net of tax: Unrealized holding gains/(losses) arising during period 30 1,460 130 530 Comprehensive income $4,274 $6,016 $8,534 $12,632 Basic earnings per share before extra. gain $ 0.42 $0.45(1) $0.84 $0.89(1) Basic earnings per share extra.gain 0.00 0.00(1) 0.00 0.31(1) Basic earnings per share after extra.gain 0.42 0.45(1) 0.84 1.20(1) Diluted earnings per share before extra. gain 0.42 0.45(1) 0.83 0.89(1) Diluted earnings per share extra.gain 0.00 0.00(1) 0.00 0.30(1) Diluted earnings per share after extra.gain 0.42 0.45(1) 0.83 1.19(1) Average shares outstanding 10,063 10,060(1) 10,063 10,057(1) (1) Per share data and average shares outstanding have been restated to reflect the 10% stock dividend issued on April 15, 1997. The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows Six months ended June 30 (In thousands) 1998 1997 Cash flows from operating activities: Net income $ 8,404 $12,102 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,420 2,548 Provision for loan and other real estate losses 6,574 3,474 Securities gains, net 0 (119) Gain on sale of loans, net (1,104) (447) Gain on sale of assets (3) 4 Net amortization of securities premiums 171 181 Net change in loans held for sale 1,220 77,793 Changes in: Other assets 1,492 (9,481) Other liabilities 2,178 3,187 Net cash provided by operating activities 21,352 89,242 Cash flows from investing activities: Proceeds from: Sale/call of securities available-for-sale 2,189 29,201 Maturity of securities available-for-sale 29,131 26,337 Maturity of securities held-to-maturity 5,582 2,792 Principal payments on mortgage-backed securities 13,198 1,927 Purchase of: Securities available-for-sale (12,613) (13,015) Securities held-to-maturity 0 0 Mortgage-backed securities 0 (1,000) Net change in loans (32,759) (95,790) Net change in premises and equipment (3,276) (2,984) Other 1 0 Net cash used in investing activities 1,453 (52,532) Cash flows from financing activities: Net change in deposits 24,804 (20,084) Net change in federal funds purchased and other short-term borrowings (20,751) (20,444) Advances from Federal Home Loan Bank 31,000 70,232 Repayments of advances from Federal Home Loan Bank (6,762) (56,604) Proceeds from long-term debt 0 34,500 Payments on long-term debt (96) (132) Payments for redemption of common stock (96) 0 Issuance of common stock 67 230 Dividends paid (4,026) (3,652) Net cash provided by financing activities 24,140 4,046 Net increase (decrease) in cash and cash equivalents 46,945 40,756 Cash and cash equivalents at beginning of year 61,404 63,884 Cash and cash equivalents of acquired banks 176,358 0 Cash and cash equivalents at end of period $284,707 $104,640 The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies The accounting and reporting policies of Community Trust Bancorp, Inc. (the "Company"), and its subsidiaries on a consolidated basis conform to generally accepted accounting principles and general practices within the banking industry. Principles of Consolidation - The unaudited consolidated financial statements include the accounts of the Company and its separate and distinct, wholly owned subsidiaries Community Trust Bank, NA, Community Trust Bank, FSB, Trust Company of Kentucky, National Association, Community Trust Bank of West Virginia, NA, CTBI Preferred Capital Trust, and Community Trust Funding Corporation. All significant intercompany transactions have been eliminated in consolidation.
Note 2 - Securities Generally Accepted Accounting Principles requires that securities be classified into held-to-maturity, available-for-sale, and trading categories. We currently have held-to-maturity and available-for-sale securities. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those which the Company may decide to sell if needed for liquidity, asset- liability management or other reasons. Available-for- sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. The amortized cost and fair value of securities available-for- sale as of June 30, 1998 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 38,780 $ 39,071 Mortgage-backed pass through certificates 63,579 64,083 Collateralized mortgage obligations 17,335 17,256 Other debt securities 7,215 7,349 Total debt securities 126,909 127,759 Equity securities 18,977 19,138 Total Securities $145,886 $146,897 The amortized cost and fair value of securities held-to-maturity as of June 30, 1998 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 16,475 $ 15,055 States and political subdivisions 44,017 45,178 Mortgage-backed pass through certificates 30,695 30,585 Collateralized mortgage obligations 5,918 5,832 Total Securities $ 97,105 $ 96,650
Note 3 - Loans Major classifications of loans are summarized as follows: June 30 December 31 (in thousands) 1998 1997 Commercial, secured by real estate $ 320,176 $ 310,092 Commercial, other 265,384 260,808 Real Estate Construction 89,811 85,825 Real Estate Mortgage 399,122 407,893 Consumer 395,235 361,927 Equipment Lease Financing 6,304 1,884 $1,476,032 $1,428,429 Note 4 - Long-Term Debt Long-Term Debt consists of the following: June 30 December 31 (in thousands) 1998 1997 Trust Preferred Securities * $ 34,500 $ 34,500 Senior Notes 17,230 17,230 Other 1,637 1,733 $ 53,367 $ 53,463 Refer to the Corporation's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1997 for information concerning rates and assets securing long-term debt. * In April 1997, CTBI Preferred Capital Trust ("CTBI Trust"), a trust created under the laws of the State of Delaware, issued $34.5 million of 9.0% cumulative trust preferred securities ("Preferred Securities"). The Corporation owns all of the beneficial interests represented by common securities ("Common Securities") of CTBI Trust, which exists for the sole purpose of issuing the Preferred Securities and Common Securities and investing the proceeds thereof in an equivalent amount of 9.0% Subordinated Debentures which were issued by the Corporation. The Subordinated Debentures will mature on March 31, 2027, and are unsecured obligations of the Corporation. The Subordinated Debentures are irrevocably and unconditionally guaranteed by the Corporation and are subordinate and junior in right of payment to all senior debt and other subordinated debt. There are no payments due for this debt in the next five years.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Community Trust Bancorp, Inc. (the "Company") is a multi-bank holding company headquartered in Pikeville, Kentucky. At June 30, 1998 the Company owned two commercial banks, one savings bank and one trust company. Through its affiliates, the Company has over sixty banking locations serving 85,000 households in various counties in Eastern and Central Kentucky and in Western and Central West Virginia. The Company had total assets of $2.11 billion and total shareholders' equity of $162 million as of June 30, 1998. The Company's common stock is listed on NASDAQ under the symbol CTBI. Market makers are Herzog, Heine, Geduld, Inc., New York, New York; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Morgan, Keegan and Company, Inc., Memphis, Tennessee; J.C. Bradford & Co., Louisville, Kentucky; Bear, Stearns & Co., Inc., New York, New York; Robinson Humphrey Co., Inc., Atlanta, Georgia and Stifel Nicolaus & Co., Incorporated, St. Louis, Missouri. Effective January 1, 1997, the Company changed its name from Pikeville National Corporation to Community Trust Bancorp, Inc., changed the name of its lead bank from Pikeville National Bank and Trust Company to Community Trust Bank, National Association (the "Bank") and merged seven of its other commercial bank subsidiaries into the Bank. As a result of these transactions, the Bank has $1.6 billion in assets and numerous locations throughout eastern and central Kentucky. The Company's thrift and trust subsidiaries, Community Trust Bank, FSB and Trust Company of Kentucky, N.A., remain wholly-owned subsidiaries of the Company and will continue to operate as independent entities. On June 26, 1998 the Company chartered a new national assocation to operate as a national bank in the state of West Virginia. This new wholly owned subsidiary, Community Trust Bank of West Virginia, National Assocation (CTBWV) currently operates seven branches in four counties in central and western West Virginia. Commercial Bank, West Liberty On July 1, 1997 the Company completed the sale of Commercial Bank, West Liberty, Kentucky, a wholly owned state bank subsidiary for approximately $10.2 million in cash, which resulted in a pre-tax operating gain of $3.0 million. West Liberty had $79 million in assets, constituting 4% of the Company's total consolidated assets. Consistent with the Company's strategic plan, the funds generated by the sale of West Liberty will provide the Company with the opportunity to expand existing or enter into new markets through either internal expansion or acquisitions. Acquisitions After making no acquisitions during the years 1996 and 1997, on June 26, 1998 the Corporation resumed its strategic policy of diversification through acquisition. Community Trust Bancorp, Inc.'s wholly owned subsidiary, Community Trust Bank of West Virginia, National Association (CTBWV), purchased sixteen Banc One Corporation branches located in West Virginia with approximately $569 million in deposits on June 26, 1998. CTBWV paid a 9.7% premium on these deposits. In concurrent transactions, CTBWV sold three of these branches with deposits totaling $151 million to Premier Financial Bancorp, Inc. of Georgetown, Kentucky receiving a 9.7% premium; four branches with deposits totaling $122 million to Peoples Banking and
Trust Company of Marietta, Ohio receiving a 10.7% premium; and two branches with deposits totaling $80 million to United Bankshares of Charles Town, West Virginia receiving 11.7% premium. The additional 1% premium paid by Peoples Banking and Trust Company and the additional 2% premium paid by United Bankshares was divided evenly between CTBWV and Premier Financial Bancorp, Inc. as part of a prior agreement. CTBWV retained seven branches with deposits totaling $216 million. The funds used to purchase these branches were provided from the sale of Trust Preferred Securities that occurred in April 1997 and the sale of an affiliate bank in July 1997. The facilities that were purchased will continue to operate as banking offices. This acquisition will assist in growth of the Company outside of Kentucky and provide a new customer base for generating additional revenues. On May 26, 1998, Community Trust Bank, NA and PNC Bank, NA, entered into a definitive agreement for Community Trust Bank to purchase five branches in Central Kentucky from PNC Bank. The agreement includes the purchase of PNC Bank branch facilities, and related deposits, consumer loans and business banking relationships for the following locations: Main Office, Harrodsburg (Mercer County); Main Office and Eastern By-Pass Office, Richmond (Madison County); Main Office and Winchester Plaza Office, Winchester (Clark County). PNC Bank will retain its large corporate, credit card, trust, merchant services, mortgage and brokerage relationships in Mercer, Madison, and Clark counties. It will also continue to operate four branch offices in Lexington. Community Trust Bank will acquire approximately $195 million in deposits, and $50 million in consumer and business loans along with related fixed assets, leases, safe deposit box business and other agreements. The transaction is expected to close by September 1998. Stock Dividend On February 18, 1997, the Company's Board of Directors declared a 10% stock dividend. This stock dividend, paid on April 15, 1997 to shareholders of record on March 15, 1997, was in addition to the regular quarterly cash dividends paid on (1) April 1, 1997 of 18 cents per share for shareholders of record on March 15, 1997, (2) July 1, 1997 of 18 cents per share for shareholders of record on June 15, 1997, (3) October 1, 1997 of 18 cents per share for shareholders of record on September 15, 1997, (4) January 1, 1998 of 20 cents per share for shareholders of record on December 15, 1997, (5) April 1, 1998 of 20 cents per share for shareholders of record on March 15, 1998 and (6) July 1, 1998 of 20 cents per share for shareholders of record on June 15, 1998. All per share data has been restated to reflect this stock dividend.
Income Statement Review The Company's net income before extraordinary items for the three months ended June 30, 1998 was $4.2 million or $0.42 per share as compared to $4.6 million or $0.45 per share for the three months ended June 30, 1997. Total earnings for the six months ended June 30, 1998 were $8.4 million or $.84 per share. Total earnings for the six months ended June 30, 1997 were $12.1 million or $1.20 per share including an extraordinary item of $3.0 million or $0.31 per share received in a settlement from a former vendor. The following table sets forth on an annualized basis the return on average assets and return on average shareholders' equity for the three and six months ended June 30, 1998 and 1997: Three months ended Six months ended June 30 June 30 1998 1997 1998 1997 Return on average shareholders' equity before extraordinary item 10.52% 11.98% 10.76% 12.05% after extraordinary item 10.52% 11.98% 10.76% 16.17% Return on average assets before extraordinary item 0.90% 0.99% 0.91% 0.99% after extraordinary item 0.90% 0.99% 0.91% 1.33% The Company's net income for the second quarter of 1998 decreased $316 thousand or 7% as compared to the same period in 1997. Earnings per share decreased $0.03 per share or 7% for the three months ended June 30, 1998, as compared to the second quarter of 1997. The decrease in net income was the result of an increase in the provision for loan losses. During the quarter the Company continued to strengthen the allowance for loan losses as charge-offs in the Indirect Auto Loan Portfolio continue at high levels. As reported in the first quarter, the Company has tightened the credit underwriting and collection procedures in the Indirect Auto Loan Portfolio. Analysis of new credits booked since January 1, 1998 reflect improved credit quality in line with management's expectations. Provision for loan losses for the three months ended June 30, 1998 was $4.1 million, an increase of $2.4 million for the same period in 1997. For the six months ended June 30, 1998 the provision was $6.6 million, a 90% increase over the same period in 1997 resulting primarily from a 18% growth in the Company's allowance for loan losses over the same period. The ratio of allowance for loan losses to total loans increased from 1.45% at June 30, 1997 to 1.53% at June 30, 1998. Net noninterest income increased $1.1 million for the quarter as compared to the second quarter of 1997. As a result of the sale of the nine branches discussed above in the West Virginia acquisition, a gain was recorded which contributed to an increase of noninterest income from $3,741,000 for the three months ended June 30, 1997 to $5,817,000 for the three months ended June 30, 1998. Net noninterest expense for the quarter decreased by $434 thousand as compared to the same period in 1997. Net Interest Income Net interest income decreased $651 thousand or 3.4% from $19.4 million for the second quarter of 1997 to $18.8 million for the second quarter of 1998. Interest income and interest expense both increased for the quarter ending June 30, 1998 as compared to the same period in 1997, with interest income increasing $0.6 million and interest expense increasing $1.2 million. The decrease in net interest income for the three month period was primarily due to a lower net interest margin. The decrease in margin was driven by a higher cost of funds.
The yield on interest earning assets decreased 6 basis points for the second quarter of 1998 as compared to the same period in 1997. The cost of interest bearing funds increased 18 basis points for the second quarter of 1998 as compared to the same period in 1997. As a result, the net interest margin decreased from 4.68% for the second quarter of 1997 to 4.43% for the current quarter. The Company's loan portfolio, its highest yielding asset, continues to expand through new market share and internally generated growth. The Company's loan portfolio increased 10.7% from $1.31 billion for the second quarter of 1997 to $1.45 billion for the second quarter of 1998. Loans accounted for 89% of total interest income for the second quarters of both 1998 and 1997. The following table summarizes the annualized net interest spread and net interest margin for the three months and six months ended June 30, 1998 and 1997. Three Months Ended Six months ended June 30 June 30 1998 1997 1998 1997 Yield on interest earning assets 8.99% 9.05% 9.03% 9.07% Cost of interest bearing funds 5.23% 5.05% 5.24% 4.98% Net interest spread 3.76% 4.00% 3.79% 4.09% Net interest margin 4.43% 4.68% 4.47% 4.76% Provision for Loan Losses The analysis of the changes in the allowance for loan losses and selected ratios are set forth below. Six Months Ended June 30 (in thousands) 1998 1997 Allowance balance January 1 $20,465 $18,825 Allowance of purchased loans 311 0 Additions to allowance charged against operations 6,558 3,449 Recoveries credited to allowance 2,136 1,844 Losses charged against allowance (6,929) (4,955) Allowance balance at June 30 $22,541 $19,163 Allowance for loan losses to period-end loans 1.53% 1.45% Average loans, net of unearned income $1,433,777 $1,338,485 Provision for loan losses to average loans, annualized .92% .52% Loan charge-offs, net of recoveries to average loans, annualized .67% .46%
During the quarter the Company continued to strengthen the allowance for loan losses as charge-offs in the Indirect Auto Loan Portfolio continue at high levels. As reported in the first quarter, the Company has tightened the credit underwriting and collection procedures in the Indirect Auto Loan Portfolio. Analysis of new credits booked since January 1, 1998 reflect improved credit quality in line with management's expectations. Net charge-offs represent the amount of loans charged off less amounts recovered on loans previously charged off. Net charge-offs as a percentage of average loans outstanding increased 21 basis points to 0.67% for the six months ended June 30, 1998 as compared to the same period in 1997. The Company's non-performing loans (90 days or more past due and non- accrual) were 1.46% and 1.43% of outstanding loans at December 31, 1997 and June 30, 1998, respectively. Any loans classified as loss, doubtful, substandard or special mention that are not included in non-performing loans do not (1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources or (2) represent material credits about which management has knowledge of any information which would cause management to have serious doubts as to the ability of the borrowers to comply with the loan repayment terms. The Company does not believe there are currently any trends, events or uncertainties that are reasonably likely to have a material effect on the volume of its non- performing loans. Noninterest Income As a result of the sale of the nine branches discussed above in the West Virginia acquisition, a gain was recorded which contributed to an increase in noninterest income from $3,741,000 for the three months ended June 30, 1997 to $5,817,000 for the three months ended June 30, 1998, an increase of 55.5%. Gains on the sale of loans represent the largest percentage growth category, increasing 175% for the three months ended June 30, 1998 as compared to the same period in 1997. Other noninterest income increased 126% for the three months ended June 30, 1998 as compared to the same period in 1997 due to the gain on the sale of branches described above. Deposit related fees and trust fees stayed unchanged from the second quarter of 1997. Noninterest Expense The Company's noninterest expense decreased by 2.9% from $14.7 million for the three months ended June 30, 1997 to $14.3 million for the same period in 1998. The sale of the corporation's subsidiary, Commercial Bank of West Liberty, accounted for the majority of the reduction in noninterest expense. However; an aggressive cost reduction program has allowed the Company to reduce its overall operating expenses as well. Personnel costs have decreased by 3.8% after adjusting for the sale of Commercial Bank of West Liberty; while other noninterest expense decreased by 10.5% after adjusting for the sale of Commercial Bank of West Liberty. Balance Sheet Review Total asset size was $1.85 billion at December 31, 1997 compared to $2.11 billion at June 30, 1998. During the last six months, loans increased from $1.41 billion to $1.45 billion. Federal Funds Sold increased from a zero balance at December 31, 1997 to $210.17 million at June 30, 1998. This increase is primarily the result of the payment by Bank One on June 26, 1998 for the assumption of deposits of the seven branches acquired from Bank One by the Company's West Virginia affiliate. The asset category which declined most was securities available-for-sale; declining from $165.6 million at December 31, 1997 to $146.9 million at June 30, 1998.
As a result of the West Virginia acquisition the Company's largest liability, deposits, increased from $1.47 billion as of December 31, 1997 to $1.71 billion as of June 31, 1998. Noninterest bearing deposits increased from $193.3 million at December 31, 1997 to $213.6 million at June 30, 1998. Interest bearing deposits increased from $1,271.7 million at December 31, 1997 to $1,491.9 million at June 30, 1998. The Company decreased its Federal funds purchased and other short term borrowings during the period from $57.9 million as of December 31, 1997 to $40.1 million as of June 30, 1998. The Company's advances from the Federal Home Loan Bank increased from $101.8 million at December 31, 1997 to $126.1 million at June 30, 1998 as the Company used this liquidity as a source of funding for loan growth. Loans Loans increased from $1.40 billion as of December 31, 1997 to $1.45 billion as of June 30, 1998, due to the growth of the Company's commercial and consumer loan portfolios. The category of commercial loans increased from $648.9 million as of December 31, 1997 to $673.9 million as of June 30, 1998 while consumer loans increased from $361.9 million as of December 31, 1997 to $395.2 million as of June 30, 1998. Non-accrual and 90 days past due loans amounted to 1.46% of total loans outstanding as of December 31, 1997 and 1.43% of total loans outstanding as of June 30, 1998. Non-accrual loans as a percentage of total loans outstanding were 0.84% as of December 31, 1997 and 0.92% at June 30, 1998. During the same period, loans 90 days or more past due decreased 11 basis points from 0.62% of total loans outstanding to 0.51%. The allowance for loan losses increased from 1.42% of total loans outstanding as of December 31, 1997 to 1.53% as of June 30, 1998. The allowance for loan losses as a percentage of non-accrual loans and loans past due 90 days or more was 98% at December 31, 1997 and 107% June 30, 1998. The following table summarizes the Company's loans that are non- accrual or past due 90 days or more as of June 30, 1998 and December 31, 1997. As a % of Accruing loans As a % of Non-accrual loan balances past due 90 loan balances loans by category days or more by category (in thousands) June 30, 1998 Commercial loans, secured by real estate $ 2,002 0.50% $ 323 0.08% Commercial loans, other 8,010 2.95 3,096 1.14 Consumer loans, secured by real estate 3,203 0.79 2,450 0.60 Consumer loans, other 331 0.08 1,649 0.42 Total $13,546 0.92% $7,518 0.51% December 31, 1997 Commercial loans, secured by real estate $ 3,881 1.25% $2,339 0.75% Commercial loans, other 6,294 2.40 878 0.33 Consumer loans, secured by real estate 1,569 0.32 3,857 0.78 Consumer loans, other 314 0.09 1,789 0.49 Total $12,058 0.84% $8,863 0.62%
Allowance for loan losses Management analyzes the adequacy of its allowance for loan losses on a quarterly basis. The loan portfolio of each market region is analyzed by each major loan category, with a review of the following areas: (i) specific allocations based upon a review of selected loans for loss potential; (ii) an allocation which estimates reserves based upon the remaining pool of loans in each category derived from historical net charge-off data, delinquency trends and other relevant factors and (iii) an unallocated portion of the allowance which provides for a margin of error in estimating the allocations described above and provides for risks inherent in the portfolio which may not be specifically addressed elsewhere. Off-balance sheet risk is addressed by including letters of credit in the Company's allowance adequacy analysis and through a monthly review of all letters of credit outstanding. The Company's loan review and problem loan analysis includes evaluation of deteriorating letters of credit. Volume and trends in delinquencies are monitored monthly by management, regional advisory boards and the boards of directors of the respective banks. Securities The Company uses its securities held-to-maturity for production of income and to manage cash flow needs through expected maturities. The Company uses its securities available-for-sale for income and balance sheet liquidity management. The book value of securities available-for-sale decreased from $165.6 million as of December 31, 1997 to $146.9 million as of June 30, 1998. Securities held-to- maturity declined from $115.9 million to $97.1 million during the same period. Total securities as a percentage of total assets were 15.2% as of December 31, 1997 and 11.6% as of June 30, 1998. Disclosures Regarding Year 2000 Many companies have undertaken major projects to address "Year 2000" readiness, which relates to the recognition of dates beyond 1999. Many software programs and hardware systems are in a two digit format which will not process into the next century. Community Trust Bancorp, Inc. has already taken steps necessary to ensure that this Company will be "Year 2000 compliant". Those steps include the following: * We have assessed the significant issues throughout our organization and our customer base, in order to be prepared for proper processing of information. * We have implemented a Steering Committee and Project Team to oversee the successful attainment of Year 2000 compliance. * We have completed an inventory of all hardware, software, systems, and facilities to identify products which must be replaced, retired, or renovated. * We have contacted all respective third party providers of computer-related services and have requested that they provide evidence to us by June 1998 of their intention to be Year 2000 compliant. * We have created a test environment to validate software, hardware, and systems as new releases become available. * The Company's Board of Directors and Executive Management has committed to providing the appropriate resources and workforce necessary to ensure compliance with Year 2000.
We anticipate that all internal hardware upgrades or replacements will be completed by March 1999. The costs associated with hardware and software upgrades will be approximately $450,000 in 1998 and $1,400,000 in 1999. Management believes that these estimates are generous and that these costs are not material to the financial condition of the Company. Our most significant exposure will be relying upon third party vendors and processors and managing our relationship with their product or service as we test their Year 2000 Ready product. Our core third party data processor, one of the country's leading suppliers of financial institution data processing services, has already provided assurances that they will be Year 2000 compliant prior to mid-year 1999. As testing occurs throughout 1998, any vendors who cannot certify their intentions to be Year 2000 compliant will be abandoned and new vendors will be contacted. We anticipate being finished with Year 2000 issues by the middle of 1999. The Federal Financial Institution Examination Council has issued guidelines for all financial institutions to assess their Year 2000 readiness. Management has reviewed these guidelines and has determined that their plan is in compliance with them. Liquidity and Capital Resources The Company's liquidity objectives are to ensure that funds are available for the affiliate banks to meet deposit withdrawals and credit demands without unduly penalizing profitability, and to ensure that funding is available for the Company to meet ongoing cash needs while maximizing profitability. The Company continues to identify ways to provide for liquidity on both a current and long-term basis. The subsidiary banks rely mainly on core deposits, certificates of $100,000 or more, repayment of principal and interest on loans and securities and federal funds sold and purchased to create long-term liquidity. The subsidiary banks also rely on the sale of securities under repurchase agreements, securities available-for-sale and Federal Home Loan Bank borrowings. Deposits increased from $1.465 billion to $1.706 billion from December 31, 1997 to June 30, 1998. Noninterest bearing deposits increased by $20.2 million while interest bearing deposits increased by $220.3 million. Due to the nature of the markets served by the subsidiary banks, management believes that the majority of its certificates of deposits of $100,000 or more are no more volatile than its core deposits. During the periods of low interest rates, these deposit balances remained stable as a percentage of total deposits. In addition, arrangements have been made with correspondent banks for the purchase of federal funds on an unsecured basis, up to an aggregate of nearly $100 million, if necessary, to meet the Company's liquidity needs.
The Company owns $149.1 million of securities valued at market price that are designated as available-for-sale and available to meet liquidity needs on a continuing basis. The Company also relies on Federal Home Loan Bank advances for both liquidity and management of its asset/liability position. These advances have sometimes been matched against pools of residential mortgage loans which are not sold in the secondary market, some of which have original maturities of ten to fifteen years. Federal Home Loan Bank advances increased from $101.8 million as of December 31, 1997 to $131.9 million as of March 31, 1998. The Company generally relies upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as federal funds purchased and securities sold under repurchase agreements, and issuance of long-term debt. The Company currently has a $17.5 million revolving line of credit available to meet any future cash needs. (See long-term debt footnote to the consolidated financial statements.) The Company's primary investing activities include purchases of securities and loan originations. In conjunction with maintaining a satisfactory level of liquidity, management monitors the degree of interest rate risk assumed on the balance sheet. The Company monitors its interest rate risk by use of the static and dynamic gap models at the one year interval. The static gap model monitors the difference in interest rate sensitive assets and interest rate sensitive liabilities as a percentage of total assets that mature within the specified time frame. The dynamic gap model goes further in that it assumes that interest rate sensitive assets and liabilities will be reinvested. The Company uses the Sendero system to monitor its interest rate risk. The Company desires an interest sensitivity gap of not more than fifteen percent of total assets at the one year interval. On a limited basis, the Company may use interest rate swaps and sales of options on securities as additional tools in managing interest rate risk. Interest rate swaps involve an exchange of cash flows based on the notional principal amount and agreed upon fixed and variable interest rates. In this transaction, the Company would typically agreed to pay a floating interest rate based on London Inter- Bank Offering Rate (LIBOR) and receive a fixed interest rate in return. On options, the Company would typically sell the right to a third party to purchase securities the Company currently owns at a fixed price on a future date. The Company had no options outstanding at June 30, 1998. The impact on operations of interest rate swaps and options was not material during the first six months of 1997 or 1998. The Company's principal source of funds used to pay dividends to shareholders and service long-term debt is the dividends it receives from subsidiary banks. Various federal and state statutory provisions, in addition to regulatory policies and directives, limit the amount of dividends that subsidiary banks can pay without prior regulatory approval. These restrictions have had no major impact on the Company's dividend policy or its ability to service long-term debt, nor is it anticipated that they will have any major impact in the foreseeable future. In addition to the subsidiary banks' 1998 profits, approximately $1.7 million can be paid to the Company as dividends without prior regulatory approval. The primary source of capital for the Company is retained earnings. The Company paid cash dividends of $0.40 per share for the first six months of 1998 and $0.36 per share for the first six months of 1997. Earnings per share for the same periods were $0.84 and $1.20, respectively. The Company retained 52% of earnings for the first six months of 1998.
Under guidelines issued by banking regulators, the Company and its subsidiary banks are required to maintain a minimum Tier 1 risk- based capital ratio of 4% and a minimum total risk-based ratio of 8%. Risk-based capital ratios weight the relative risk factors of all assets and consider the risk associated with off-balance sheet items. The Company must also maintain a minimum Tier 1 leverage ratio of 4% as of June 30, 1998. The Company's Tier 1 leverage, Tier 1 risk-based and total risk-based ratios were 9.18%, 10.94% and 12.20%, respectively as of June 30, 1998. As of June 30, 1998, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or would be reasonably likely to have, a material adverse impact on the Company's liquidity, capital resources, or operations. Impact of Inflation and Changing Prices The majority of the Company's assets and liabilities are monetary in nature. Therefore, the Company differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation. Management believes the most significant impact on financial and operating results is the Company's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.
PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a vote of Security Holders The Company's Annual Meeting of Shareholders was held on April 28, 1998. The following items were approved: 1) Election of the following members to the Company's Board of Directors for the ensuing year. Nominee In Favor Withheld Charles J. Baird 7,234,624 78,930 Burlin Coleman 7,241,113 72,441 Nick A. Cooley 7,144,494 169,060 William A. Graham, Jr. 7,242,623 70,931 Jean R. Hale 7,242,618 70,936 Brandt T. Mullins 7,239,212 74,342 M. Lynn Parrish 7,244,024 69,530 Ernest M. Rogers 7,239,212 74,342 Porter P. Welch 7,239,712 73,842 2) Approval of the 1998 Stock Option Plan. The votes of the shareholders on this item were as follows: In Favor Opposed Abstained 5,642,098 939,375 128,333 3)Ratification of Ernst & Young, L.L.P. as the Company's independent certified public accountants for 1998. The votes of the shareholders on this item were as follows: In Favor Opposed Abstained 7,250,621 33,175 29,758 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 27. Financial Data Schedule b. Reports on Form 8-K During the second quarter of 1998, the Company filed a Current Report on Form 8-K (filing date June 2, 1998) with respect to the execution of a definitive agreement relating to Community Trust Bank's proposed purchase of five branch offices located in Central Kentucky from PNC Bank, NA.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMUNITY TRUST BANCORP, INC. by Date: August 14, 1998 /s/Burlin Coleman Burlin Coleman Chairman of the Board, President and Principal Executive Officer